Share Class
Category of shares with distinct rights — equity vs preference; voting vs non-voting; ordinary vs Class A/B/DVR. Governed by Section 43 and the AoA.
A share class is a category of shares carrying a distinct set of rights and restrictions — economic (dividend, liquidation), governance (voting), and procedural (transfer, conversion). Under Section 43 of the Companies Act 2013, every Indian company can issue:
- Equity share capital
- - With voting rights (default 'equity' shares)
- - With differential rights as to dividend, voting, or otherwise — DVR shares under Rule 4 of the Companies (Share Capital and Debentures) Rules 2014
- Preference share capital
Equity shares — Section 43(a)(i):
The ordinary residual equity. Voting rights on every resolution placed at a general meeting; ranks last on liquidation; entitled to dividend out of profits available for distribution.
DVR (Differential Voting Rights) shares:
- Often used by Indian founders to retain control while diluting economic ownership.
- Rule 4 limits: DVR cannot exceed 74% of total post-issue voting power (per current rules — verify against latest amendment).
- Conditions: company must have consistent track record of distributable profits for the last 3 years; must have filed all annual returns and financial statements; cannot have defaulted on dividend, interest, statutory dues.
- Issuance requires ordinary resolution (special resolution for listed entities under SEBI).
Preference shares — Section 43(b):
Shares with preferential rights as to (a) dividend (fixed or % linked) and (b) repayment of capital on winding-up, ahead of equity.
- Cumulative vs Non-cumulative — unpaid dividends accumulate or lapse.
- Participating vs Non-participating — share in surplus profits beyond fixed dividend.
- Redeemable — must be redeemed within 20 years of issue.
- Convertible (Compulsorily / Optionally) — convert to equity. Most Indian VC instruments are CCPS — see CCPS.
Voting on preference shares (Section 47(2)):
- Vote only on resolutions directly affecting their rights, by default.
- Full voting if dividend on preference shares is in arrears for 2 or more years — automatic enlargement of voting.
Practical structure in Indian VC-backed startups:
- Equity shares — founders, employees (via ESOP exercise), early angels
- Seed Preference Series (Seed CCPS) — seed VC
- Series A CCPS / Series B CCPS — subsequent rounds
- Each preference series with its own liquidation preference, anti-dilution, dividend, conversion ratio, and class-vote items
Multiple classes mean multiple folios in the Register of Members (MGT-1) and multiple line items in PAS-3 allotments. Track meticulously.
The dominant Indian VC instrument. Preference shares that must convert to equity by a fixed date — providing downside protection plus equity upside.
Hybrid debt instruments that must convert to equity by a fixed date. Treated as equity under FEMA; popular for FDI-route investments into Indian startups.
Equity-linked employee incentive scheme under Section 62(1)(b). Tax events at exercise (perquisite) and sale (capital gains). Min 1-year vesting period.
Investor right to receive proceeds before equity holders on a liquidation event. Indian VC standard is 1x non-participating.
Ledger of every security issued by a company — equity, preference, options, warrants, convertibles — and the ownership percentages they represent.